What is mania? It is defined as a mental illness characterized by great agitation, euphoria, delusions and overactivity. When investing, this is expressed in investment decisions driven by fear and greed, without being mitigated by analysis, reason or balance between the results of risk and rewards. Mania usually runs in parallel with the development of the product business, but time can sometimes go awry.
The technology.com boom of the late 1990s and today’s cryptocurrency boom are two examples of how a mania works in real time. These two events will be highlighted with each stage in this article.
Stage of the idea
The first stage of the mania starts with a great idea. The idea is not yet known to many people, but the potential for profit is huge. This usually translates to unlimited profits, as “something like this has never been done before.” The Internet was one such case. People using paper systems at the time were skeptical, “How can the Internet replace such a well-known and well-established system?” The backbone of the idea is beginning to take shape. This has become the modems, servers, software and websites needed to turn the idea into something tangible. Investments in the idea stage start weak and are made by people “familiar”. In this case, it could be the visionaries and the people working on the project.
In the world of cryptocurrencies, the same question is asked: How can part of the crypto code replace our monetary system, contractual system and payment systems?
The first websites were rude, limited, slow and annoying. Skeptics would look at the words “information superhighway” that the visionaries uttered and said “how can this really be so useful?” The forgotten element here is that ideas start at their worst and then develop into something better and better. This sometimes happens due to better technology, larger scale and cheaper costs, better applications for the product in question or more familiarity with the product, combined with great marketing. In terms of investment, early consumers are getting involved, but there is still no euphoria and astronomical return. In some cases, the investment has yielded a decent return, but not enough to encourage the masses to get involved. This is similar to the slow internet connections of the 90s, the collapse of Internet sites or inaccurate information in search engines. In the world of cryptocurrencies, this is reflected in the high cost of digging coins, slow transaction times and hacking or stealing accounts.
It’s starting to turn out that this internet and “.com” is the hottest new thing. The products and the tangibility are constructed, but due to the huge scale, the cost and time spent would be huge before everyone uses them. The investment aspect of the equation is beginning to outpace business development as markets discount business potential with the cost of investment. The euphoria began to materialize, but only among the first adoptive parents. This is happening in the world of cryptocurrencies with the explosion of new “altcoins” and the big media press that the space is receiving.
This stage is dominated by the parabolic returns and the potential that the Internet offers. I don’t think much about implementation or problems, because “the return is huge and I don’t want to miss it.” The words “irrational abundance” and “mania” are beginning to become common as people buy out of sheer greed. Negative risks and largely ignored. Symptoms of mania include: Any company that has.com in its name is hot, the analysis is thrown out the window in favor of optics, investment knowledge is becoming less obvious among new entrants, expectations for 10 or 100 returns on luggage are common and few people actually know how the product works or doesn’t work. This took place in the world of cryptocurrencies with stellar returns from the end of 2017 and incidents with shares of companies that jumped hundreds of percentage points by using “blockchain” in their name. There are also “takeover bids” in which front companies that are listed but are dormant change their names to something involving a blockchain, and the shares are suddenly actively traded.
The collapse and the burning
The business scene for the new product is changing, but not as fast as the investment scene. Eventually, a change in thinking occurs and a huge sale begins. Volatility is huge and many of the “weak hands” have been wiped out of the market. Suddenly, analysis is used again to justify that these companies have no value or are “overvalued”. Fear is spreading and prices are accelerating. Companies that have no profits and that survive with noise and future prospects are blown away. Incidents of fraud and fraud that are increasing to take advantage of greed have been uncovered, causing more fear and selling off securities. Businesses that have the money are quietly investing in the new product, but the pace of progress is slowing because the new product is an “ugly word” unless profits are convincingly demonstrated. This is beginning to happen in the world of cryptocurrencies with the folding of credit schemes using cryptocurrencies and the more common cases of coin theft. Some of the marginal coins decrease in value due to their speculative nature.
At this stage, the investment landscape is charred with stories of losses and bad experiences. Meanwhile, the great idea is becoming tangible and for the business that uses it, it’s a boom. Begins to be applied in daily activities. The product is beginning to become the standard, and visionaries are quoted as saying that the “information superhighway” is real. The average consumer notices an improvement in the product and he starts mass acceptance. Businesses that have had a real profit strategy get hit during the collapse and burnout phase, but if they have the money to survive, they get to the next wave. This has not yet happened in the world of cryptocurrencies. The expected survivors are those who have a tangible business case and corporate support – but it remains to be seen which companies and coins this will be.
The next wave – Business is catching up
At this stage, the new product is standard and the profits become obvious. The business case is now based on profits and scale, not on the idea. A second wave of investment emerges, starting with these survivors and extending to another early-stage mania. The next stage is characterized by companies for social media, search engines and online shopping, which are derivatives of the original product – the Internet.
Mania works on a pattern that manifests itself in a similar way over time. Once one recognizes the stages and thought process of each, it becomes easier to understand what is happening and investment decisions become clearer.